we have 2 AAA and one AA+. but does anyone expect us to pay off our debts anytime soon rather than just let inflation eat at them? if people or organizations tried to take their money out we don’t have the funds to pay them. plus our politics is totally dysfunctional. plus with our messed up health care system we will see even bigger debts in time. we don’t seem like a good investment in many ways.
On the plus side the us has a gdp about at our debt, and w have something like $200 trillion in. public and private assets here. so our debt is only about 12% of our national assets.
The credit score is, in a sense, a prediction about whether or not the federal government will pay the interest on its bills, notes, and bonds. It is not intended to predict whether the government will pay off the entire debt; very few governments ever do that. It’s also not intended to describe whether American politicians are acting in a mature, intelligent, and polite manner. It’s all about the interest payments, and the ratings agencies believe that the government probably will continue to make those interest payments.
It may be worth remembering that 10 years ago, many of the European countries have good credit ratings, but have since given investors a “haircut”. Likewise incorrect ratings on many corporate investments in the USA played a role in the 2008 financial meltdown.
I don’t think you understand the U.S. debt. We have fixed payment vehicles (T Bills, Bonds, etc.) and we have always paid them off. We can’t pay them off early, and it would be a world wide financial disaster if we stopped taking on new debt. Having debt is no necessarily a bad thing.
Our credit rating is based on our huge economy, huge military, and political stability (yes they suck, but no president has ever been forced to leave office and every transition of power has been peaceful and on schedule).
Many? Other than Greece, have any European countries given investors a haircut?
Anyway, the rating agencies don’t rate for inflation effects, just the ability (or willingness, I guess) to pay the full principal and interest.
Because, recessions notwithstanding, we have a gigantic, powerful, dynamic, productive economy.
I’ll willingly lend money to a guy with a top-notch job and every promising sign of career success. Wouldn’t you?
Like I said, our national assets are about 12x more than our public federal debt (private debt and state/local debt also add trillions to our debt).
But it doesn’t seem like the US will be paying back its debt anytime soon. The last time we had a balanced budget and started paying down the debt was during the final years of Clinton, and that was only because we had a good economy (possibly due to the tech boom, which may not be something we can replicate consistently) and because money was being taken out of Social security.
So would I loan money to someone who I thought, even if they were going to pay me interest was probably just going to do that and let inflation whittle down the principal? No, at the very least I wouldn’t consider him a great investment.
Granted that could all turn around. If we have radical tax reform and health reform (remaking our health system to be as efficient as what they have in Europe or east asia) then we could have balanced budgets again.
Before the economy collapsed the deficit was only about $100-400 billion a year. And a lot of that was the tax cuts and the war in Iraq. So we have the ability to have a more balanced budget during better economic times.
The deficit is already projected to fall back to the $400 million dollar range, so I guess you’d consider the US a good bet again.
Because you don’t understand how money works. The US is the source of dollars. Therefore it can’t run out of them. That’s how it differs from other institutions, which use dollars, but aren’t the source of them.
The government could (stupidly) choose not to pay its debts, but it can’t be unable to do so. That’s why it deserves the highest possible credit rating (Minus government (Republican) stupidity.
But the US does pay off the principal. Every time a T-bill or bond matures, the full value is paid back to the holder. The fact that paying off the principal is financed by issuing new bonds is irrelevant to the person cashing out the mature bond.
Nobody really cares if the US pays down its debt, so long as every bond issued is paid out at maturity. The credit rating is about whether bondholders will be left holding the bag, and not about whether at some point there won’t be any bonds to be held.
Just out of curiosity, can you tell us whether inflation in the usa is low or high in the past few years?
A big factor is the problems facing the Euro. If the Deutsche Mark still existed, the dollar would look dubious by comparison, and be rated lower.
Good point. Most of the US debt is not like a credit card where you are allowed (without defaulting) to decide how much you are going to pay a month and can pay the minimum payment, pay the entire thing off, or pay something in between. US notes have fixed payment schedules and a fixed maturity, e.g. 5 years, 10 years, etc. If it was like a credit card, then holders of the notes would get a variable yield based on how much the government felt like paying down this month and they might wake up one morning to find a big fat check on their porch and a note saying that their investment is over, thanks for the loan, no more payments for you (even though you just bought the note last week).
Ok, let’s take this slowly.
Like almost all large corporations, Exxon will have debt on its books pretty much indefinitely. This is not a problem. Indeed, Alan Greenspan was worried about the prospect of the US debt falling too low in 2000. His concerns were nuts at the time IMHO, but that’s just MHO. The point being that the stock of US debt plays a pretty big role in the US and world financial systems. Yes, this has been undermined by the Republican shutdown crisis. Quite frankly, I don’t think the markets or myself have gotten our heads around this.
So the US government will owe money indefinitely, just like almost all large institutions. Call this “Financing”.
The problem occurs when the US has too large a stock of debt relative to GDP, the total output of the economy. (Related: you get solvency concerns when interest rate payments grow faster than the economy.) But US debt as a share of GDP can be falling even with positive budget deficits. This happens when the denominator is growing faster than the numerator.
More generally, Larry Summers argues that The battle over the budget deficit is the wrong fight. I agree.
I thought this thread would be about something else. If a large block of the House doesn’t think default is a big deal, and they have the power to shut down the government and threaten default, then investors have to consider credit risk. That means the credit is no longer AAA, unlike the debt of, say, New Zealand. Fitch and Moody’s should downgrade, IHMO. Which quite frankly sucks.